Category: Economy

China’s state protection for their enterprise is equivalent to parents holding their kids in their arms and running the race for the kids.

Almost daily, I see messages to boycott Chinese products. How often have we thought of investing more and buying a costly product made by our local industry? How often do you really research (at the store) about the origin of the product?

Buying locally promotes local economy and consequently, helps a local ecosystem. If one wants to willfully subject our community to despair, we should stay away from contributing to our local economy. We also lose a lot of foreign currency perpetually, when we buy substandard products again and again, it affects the Macroeconomy of the country.

Despite, we all buy cheap products from China. What drives this ambivalence? Or is it that we are only as active as forwarding some messages? What would drive us to actively change our behavior?

Bloomberg published a very interesting story on how Chinese Airlines are flooding the market with cheap ticket airlines and creating an unhealthy competition of killing other national airlines. The Link is here, http://bloom.bg/2hmk28x. Below is generally and most commonly felt reaction to this Chinese Imperialism.

We need to protect our customers, our market and our ecosystem of supply chain and customers. Why? The consequences are grave. Yesterday, it was Imperialist England, tomorrow, it will be Imperialist China. We need to break this vicious cycle, somewhere. What about the protections offered through WTO?

China is circumventing WTO approved competition

Article 20 of the General Agreement on Tariffs and Trade (GATT) allows governments to act on trade in order to protect human, animal or plant life or health, provided they do not discriminate or use this as disguised protectionism. However, WTO is still lopsided with built-in obsolescence and China have found a way to circumvent competition with State Protection.

Ambivalence or Apathy?

Almost daily, I see messages to boycott Chinese products. Mostly, we all agree that we should not buy or abandon Chinese products, either for their substandard component or built in obsolescence. How often have we thought of investing more and buying a costly product made by our local industry? How often do you see really investigating yourself at the store about the origin of the product? Despite, we all buy cheap products from China.

We all know, buying locally promotes local economy and consequently, helps a local ecosystem. If one wants to willfully subject our community to despair, we should stay away from contributing to our local economy. Now, these are not unknown dynamics, despite, we all show apathy in actively changing our behavior. Some little facts not thought off generally, we lose a lot of foreign currency, it affects the Macroeconomy of the country too.

What drives this ambivalence? Or is it that we are only as active as forwarding some messages? What would drive us to actively change our behavior?

Value for Money

My father bought a ceiling fan from Usha in 1965 and except for occasional repairs or change of coil, as of 2016, that ceiling fan is still working. I knew a Professor, who worked as a fellow around at a US University at around the same time. While going back, he bought a refrigerator and barring occasional change of Freon, that is still working. That ceiling fan or that refrigerator, both hold a value despite fifty years of it continuous work. These are examples of Value to Money.

The Supply Chain – Willful Omission

In 2003, I bought a pedestal fan to withstand the summer heat of Texas. It was $39.99 plus taxes. I was so excited for the savings on that pedestal fan. Within three years, the legs broke and I had to discard that pedestal fan. Obviously, it was made it China. However, China is not to be blamed alone.

It is a completely well oiled machinerythat is destroying the value of the customer. I bought that fan from one of the biggest retail outlet. This retail outlet, as is usual in the industry, has several vendors that procure for them from China. The manufacturers, the vendors, the retailers all know that the fan will last beyond the three months of warranty period. Despite, they promoted the product. This is not an act of omission, this is an act of willful commission in promoting a product that destroys the money of your customer. Why would an entire chain do that? Why would others keep watching? Obviously, their business model runs on these cyclic purchases occurring every so many years.

Lack of collective thinking is organized society

Almost daily, I see messages to boycott Chinese products. Almost all agree that we should ban or abandon Chinese products, either for their substandard component or built in obsolescence. Despite, we all proceed and buy cheap products from China. How often have we thought of investing more and buying a costly product made by our local industry? How often do you see really investigating yourself at the store about the origin of the product?

This is primarily dictated by individual interests which overrides our norms of collective living, how can we change this behavior?

We should boycott Chinese products, including Chinese services. This is slowly going towards economic imperialism. First, low cost products with built in obsolescence and state funded manufacturing with substandard material flooding the market to kill competitive industry built on true enterprise. Now, State sponsored services killing competitive industries.

This sounds similar to a competition at school where parents are (cheating) to help their kids win the game. It is fair to drop kids to school, it is fair to be with them while they are studying, but it is not fair to do their homework. Here, China is actually holding these enterprises in their arms and running for them.

Chinese State funded Enterprise a Threat to Global Economy at Local Scale.

State funded subsidized industry with gross mismanagement of labor and environmental laws. The model is reminiscent of a philosophy adopted from vexed state machinery. If we think, this is specifically affecting only one country, we are wrong. This is almost universal. Chinese state sponsored protectionism is a threat across the globe. Almost all local economies, irrespective of the countries are likely to to affected, to a greater or lesser degree.

If a vendor has apathy towards his customer and their sentiments, if a customer lacks that collective social thinking and the Government lacks the oversight, can we really get rid of these substandard products built with obsolescence from China?

Cognitive dissonance or Collective Apathy

I believe, only a collective responsible thinking will drive this change. Who would do that?

(Wow, don’t get me wrong – Be careful; let’s differentiate Chinese man from China. Yes, it has always been challenging for us to differentiate between Pakistan and Pakistani. So, let us not repeat that).

Despite being a tool for fighting corruption, demonetization has polarized us as a society. How do we, as a society, think on a matter of vital national interest? Please see the opinion of the common man at the end of this blog. What should be done to make this a national initiative? Please read http://wp.me/p7XEWW-km

Background

The current demonetization drive for stopping corruption has either become a boon or a bane. Demonetization of currency has strongly opinionated Indian. At the core of our values, we all want corruption to be eradicated. We all differ in our perspective towards how this should be executed. Eradicating corruption is a fundamental initiative that has significant impact to our identity, polity and to the country’s Macroeconomy. Across sections of the society, many are doubtful and cynical. What makes us feel so? Why do we see a class divide and a strong polarization of opinion? What can be done to reduce this gap and drive this initiative as a national cause?

Is this stop gap? Or will it really stop?

Nefarious means are unlikely to change unless we see a substantial change in attitude towards way of living and transacting in our daily life. Whenever radical change is initiated, and if it is unaccompanied by fundamental change, the system is bound to go back to status quo. I already see those signs. So demonetisation will either stall or impede the flow of black money, temporarily but it won’t nix this at the bud.

Who likes or dislikes demonetization?

Service class and Expatriates for sure are supportive of this initiative. Their earnings are all white transactions. Business, Politician, Illegal (drugs, alcohol, nefarious political-business connections and terrorist), those using hawala, are unlikely to accept or adopt this change. Farming community will be neutral. Poor will be swayed by the noise rather than the voices they hear.

What an irony, we haven’t learnt for centuries

Earlier, the Englishman arrived in sixteenth century. They stayed, understood, conquered, consolidated, ruled and looted and deprived this golden land not just materially but made us defunct morally.

We still haven’t changed. We still think our cause above the country, prefer to be blind sighted to others perspective. Seems like, that is within our genome and our destiny or else, why can’t we listen to each other’s perspective, why should we not have a national inclusive dialog?

No, that inclusive dialog won’t happen because somewhere, we deeply trust that ‘My truth is superior than your truth’ and we go a step further, to engross all the credit for this achievement. Collectively, we have forgotten what is best for this country.

We know corruption is a national menace, it’s like an enemy within. In the best interest of the nation, we should be unified for this national cause, we should come forward and adopt and accept, and provide constructive recommendations, rise above ourselves to let this happen. To some, this may sound hollow, but nations like Japan and several from European Union, have risen because, their constituent decided to adopt that pathway. It is not a utopian principle, it’s realty with pragmatism.

Should Prime Minister Modi be inclusive?

Yes, if this needs to succeed! Do we need to do more than withdrawing old currency and circulating new notes? Do we need this to be backed up with change in our attitude and fundamental way we think and work in our daily life?

Kamarck, a Sr. Fellow at Brookings Institute Governance Studies, argues that presidents spend too little time investing on Governing. She explains the difficulties of governing in our modern political landscape, and offers examples and recommendations of how our next president can not only recreate faith in leadership but also run a competent, successful administration.’ I believe, we can easily extrapolate this to include our administrators as well.

A Kind request

This is a non-partisan exercise, not supported or aligned with any political group. Neither is this supported by any business or vested interest. To many, it is a matter of national importance and I would appreciate your motivation in spreading this message. By spreading this message, you may get to know the perspective of those within your community.

Please share your opinion when you visit the survey on the link below. As always, polls are anonymous. I have enabled single voting per device. If you have a question, kindly use the comment box to submit.

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Demonetization and India’s Macroeconomy – Will Rupee Depreciate?
After the recent demonetization in India, an event with significant and deep reverberations across its economy, the Indian economy will eventually bounce back in three phase in 1 – 3 quarters, unless accompanied by additional steps to curb the parallel economy under current economic and political environment. Next 1 -3 quarters will report at least a drop by 0.5 to 1.25 percent point in India’s GDP. Despite the economy contracting, this will be similar to deflation. Economic indicators during these phases will differ. Earliest ever blog on India’s Demonetization and its macroeconomic impact. Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization – How will it affect the Indian Macroeconomy?

Obviously, the cash financing the legal, semi legal and illegal activities has vanished. Parallel channels, pumping money on the side have suddenly gone dry. Diminution of revenue will have a domino effect in the short term. Diminution of revenue will have a domino effect in the short term. While sparing essential living activities, this will have effects on every aspect of the economy – building, sales, travel, spending etc.

This decrease will eventually, reflect on the overall economy and its growth projections. A significant proportion of free floating cash financing several essential and non-essential daily operations will be strangulated. Cash earned irrespective of means, is an asset and not having an asset or liquidity will have deep impacts. Bloomberg feels it is contraction. To me, its deflation will follow and contraction. Primarily, contraction will be due large volumes of money being sucked out of the parallel (Juggad) economy with accompanying system wide impact. It will change the barometers of all key indices, Irrespective of sectors.

These phases will last 3-4 quarters, unless complemented by addition steps to curb the parallel economy. Next 3-4 quarters will report at least a drop by 0.5 to 1.25 percent point in GDP, at best, definitely risking it from calling it recession. Does that mean inflation and recession? No, despite the economy contracting, this is not recession though it is more similar to deflation. Economic indicators on each of these phases will reflect a different figure.

Now, does that mean I am against Demonetization? Certainly not! No pregnancy is without pain and no delivery is without cry and smile, except when you induce with Cesarean section under anesthesia. However, we are talking about the birth of a new era, and we are trying to understand how this newborn will impact existing earnings and revenue potential of the country in general (the macroeconomic considerations or implications). I see deflation (not recession) with overall contraction in the economy in the immediate future. Mauro Guillen, Director of the School’s Lauder Institute and a Professor at Wharton commented, “In the short term, the move could stifle some businesses that are legal and clean, if they use cash payments. But everyone will adjust. And while it can hurt some small businesses and individuals, it is better to do it than not.”

Three phases of recovery –

Economy will be impacted on several counts from GDP, Per Capita earning, Consumption, Investment, Industrial Production, Fiscal Balance, Public Debt and Unemployment Rates. However, this recovery will be marked by three distinct phases. Each phase demarcated by particular barometer of the economy.

Phase One – Lasting until end December, when the last notes would be officially accepted.

Phase Two – Deflationary pressure contracts the economy

Phase Three – Drop in Interest rates drop to bump up economy

Phase One – The Cash Crunch Phase:

Also the immediate phase succeeding demonetization, marked by severe depletion of cash or cash crunch. Only essential purchase activities will continue. CPI and CFPI will drop during this phase. The manner in which the denominations were retracted created a perceived rather than real loss. Cash spending reduced significantly so also purchase activities. Of course, loss of purchase activities, specifically based on Cash economy, would definitely result in a drop in GDP. Consumer spending activity fell to a near halt. Consumers are refraining from making any purchases except essential items from the consumer staples, healthcare, and energy segments. However, deflation will not be seen until phase 2.

Phase Two – Deflationary Phase:

Though Bank remittances will be high, the system will still be deprived of cash flow. The system has a tendency to bounce back and people will find ways to mobilize cash to support their cash based, if not illegal transactions. This phase will be marked by liquidity mobilization will see a fall in prices on big ticket items such as real estate, less spending on luxury items etc. Apart from Real Estate, Gold and jewelry will also see diminution in value by approximately 10-15%.The next phase will have a little rebound to the GDP along with CPI but big ticket purchase will still be low.

During this period, real estate is likely to show significant down trend. Home prices may drop significantly, especially where investors have high stakes without support. Tier 1 cities will be most affected, primarily due to real estate activities being funded by investors. Tier 2 and Tier 3 will follow suite. Some reports say, accounts activity in the real estate sector, which includes a lot of cash and undocumented transactions, has already slowed down significantly, Metropolitan and Tier 1 cities reported up to a 30% fall in house prices. Industrial production will slow down on account of decrease appetite for domestic consumption. Rupee will continue depreciation against Green bag and the downward slide will be supported by Central intervention. However, decrease fiscal deficit and public debt will help Rupee from falling further. Also, imports will be impacted negatively and that will retain the value of Rupee in midterm.

Phase Three – Drop in Interest Rate:

Continued economic slowdown will mandate stimulation and the interest rates would drop, possibly by 0.5 to 0.75 percent. Trade deficit will decrease marginally. GDP will still not be back to the Nov 30, 2016 value. CPI and WPI will bounce back but not to the Oct 2016 values. Big Ticket items will continue to reel under the deflationary pressure.

End Note:

In the next 2-3 quarters, it will depreciate but eventually, after 3-5 quarters, it will be the most appreciating currency across the globe, primarily for its intrinsic strength but also secondary politicoeconomic phenomenon across the globe. By than, Trumpism will show its negative impact on dollar, Pound would not be as strong as it was Pre-Brexit, Euro should be sliding or at the most stabilized itself from sliding. Yen and Yuan both won’t show much potential for appreciating. Despite their strength, Canadian and Australian dollars won’t have to much impact.

Several factors will weigh in in favor of Rupee. As mentioned earlier, Rupee will depreciate in the next 2-3 quarters but start appreciating by early 2018. Turnaround in Rupee valuation vis a vis major currency baskets (appreciation), and slide of dollar, will most likely coincide at the same time, given the current political economic situation. Rupee should start appreciating and will dominate overall currency baskets after 3-5 quarters.

I always trust, when the enterprise, entity or a country stands on sound morals and ethical values, its long term outlook is strong. We definitely are moving in a direction towards that needed change. However, as noted earlier, I also feel this pregnancy and delivery is not without pain, cry and smile.

I consider demonetization as a key policy that has reverberations with system wide impact and a potential to clean the swamp from decades of moral erosion and political ineptitude. It’s a defining moment of our century and for India, while it was long overdue. I so strongly wish this initiative to win! So, what’s wrong and how to fix the 2016 Demonetization? Those who don’t consider it as a misfired shot, should explain how these 600 million people should manage being cashless or cash strapped until Mid or Last December, 2016. Those who consider this as not a misfired shot, should also explain how this is salvo actually hits those who indulge in black money?

The situation is similar to surgery. I mentioned two fallacies with any surgery and let the readers choose options on how to fix those. By participating in the survey, you will see where you stand amongst those who are vocal on this issue. Polls are open until Dec 4, 2016. Visit after a few days to see how your peers have voted.

What Is Good And What Needs To Be Fixed?

Or, let us ask – What is wrong with Surgery?

Surgery is indicated for an existing abnormality that causes significant functional compromise and it cannot be managed conservatively because of the inherent limitations. The procedure removes acutely offending situation, an example would be an appendix, a tumor or structural abnormality. It does not however remove the root cause that resulted in the outcome mentioned above.

Two pertinent things though – It is done with best interest standards and, the probability of successful outcome is high with anticipation, planning and execution with precision. If a doctor has vested interest in operating an appendix that was never swollen, or if the procedure is accompanied impromptu with inefficient planning and execution, no doubt, the outcome would be compromised or fail to achieve the desired outcome.

Demonetization is a long overdue indicated surgery. No doubt. A system where parallel economy is the norm meant that this was long overdue. It was obvious earlier too but no one dared challenge the system. It was as usual pleasing populist politics. It required a leader, not just with a vision, mandate but also a character, that is so much devoid of our polity. It was hard to find a leader until Narendra Modi undertook that mission.

It’s definitely a radical move, in industry parlance, they call it radical change. That radical change has to be supported by underlying fundamental change in ethos and values. Simply changing overt artifacts is unlikely to change the ground realities. When radical change is implemented without fundamental change, the system has a tendency to bounce back to its original state.

At least two major fallacies with 2016 demonetization

Of the several fallacies with the 2016 demonetization wave, I will focus on the two, which I mentioned in my earlier paragraph.

Logistics and planning were not envisioned, anticipated, planned nor executed

Selected few were aware of the likely change in advance and had already capitalized on the possibility.

Is the media biased?

Every day, we get to hear dreaded news from Modi’s Demonetization, when we talk with folks from India or whether we read a news channel. Generally, outside newspapers don’t have any political stake or bias. Generally, i won’t believe the Indian media, because you get biased news either way, highly positive or highly negative.”, the same holds true with my folks back in India. So, I can take them without that pinch of salt.

Even if I am not reflecting system wide, I can say, it was planned inadequately and executed improperly or else, why do we have to roll back the changes for farmers, college tuition, hospitals, rural areas? If this was anticipated, why is the common man at such a misery? Any radical surgery is associated with post-surgical pain, but the managing doctors have a plan, will never ask you to wreath in pain unattended. It is wrong to say the pain is created by the media, media hype. Don’t we know that the same Modi was so much exalted by the same media?

Why do we care for JFK?

Often Modi supporters point towards his celibacy and character. To be true, celibacy and personal character has nothing to do with political character or political ideology. History is replete with anecdotes of successful kings and emperors having harems with multitude of concubines. What mattered was their feel of the pulse for the masses. These rulers kept the state above themselves. Their personal life was a relaxation and second only to the state or the subjects they ruled. Not long ago, it was revealed that John F Kennedy always had a lady serving him while he was flying abroad as leader of a great nation. We all know, his vision for US and the world order, as well as the value he espoused for the most downtrodden. We all know how decisive he was during the 1962 Cuban war in avoiding third world war. To many, he is credited with putting Man over the Moon.

Why we want Modi to succeed with this initiative?

Personally, I see this as a MUST and long OVERDUE correction for Indian economy, not because of emerging digital phenomenon but to starve or eliminate the parallel economy. A failure of 2016 demonetization will be sad. An astute and courageous politician is likely to face electoral rout in the upcoming state elections, not because of acting for a good cause but for lack of vision, planning and execution.

This is one core deliverable from Modi that is so highly regarded and appreciated. It was eclectic for its system wide impacts of transforming the ethos and economy of India. Yet, it was planned with such belligerence, neglect, logistic flaws and ineptitude of executioner’s vision. This is a lesson learnt while governing a country like India with its complex mesh work of distinct economic layers.

Selected References:

I am in constant search of unbiased opinion. When I try Indian newspapers, they are either biased for Modi or vehemently against Modi. Either of which are inappropriate for understanding the ground realities. By extension, the same happens when I talk with my folks back in India. Thus, I am just disappointed gathering information from Indian Newspapers or those residing in India.

To me, established players from media from advanced countries offer better perspective. Generally, amongst India media, I choose to read Times of India, The Hindu, Financial Times, Economic Times. I prefer to read BBC, Bloomberg etc. for unbiased news about India. Below, is a collection of selected articles.

Briefly, India would be preferred over China, India won’t get outsourced jobs as much as it had earlier, India based Global companies such as Tata, Reliance, Tech companies etc. will have to employee local white working and overall, he may possibly reduce Visa and Citizenship quota. We can’t have a war with China or Pakistan and take US support for granted. Coalitions built with Obama on fire.

The implications of Trump’s policies are still not clear but based on his election manifesto and speeches and his victory speech clamp down on immigration, renegotiation of free trade agreements, rebuilding infrastructure

Briefly, India would be preferred over China, India won’t get outsourced jobs as much as it had earlier, India based Global companies such as Tata, Reliance, Tech companies Infosys, Wipro, Cognizant etc. will have to employee local white Americans and overall, he may possibly reduce visa and citizenship quota beyond those reduced by President Obama.

If India goes for a war with Pakistan or China, they can’t take US support for granted. Coalitions built with Obama are very much on fire, if those are not consistent with policy.

Political:

Coalitions built with Obama Presidency will continue but with a reciprocal basis, only if that benefits US (under Trump regime).

You fight your wars, don’t bother us. All that means is, India and US can collaborate in South China but if it is Kashmir, you fight your war with Pakistan, if it is Muslim terrorism, we collaborate.